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Covenants Intro Merger Asset Sales Outline

LLM Law Outlines > Corporate Bonds and Credit Agreement Outlines

This is an extract of our Covenants Intro Merger Asset Sales document, which we sell as part of our Corporate Bonds and Credit Agreement Outlines collection written by the top tier of NYU School Of Law students.

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IV. Covenants
A. Introduction and Overview
Kahan & Tuckman, Private vs. Public Lending
Amihud, Garbade & Kahan, A New Governance Structure for Corporate Bonds
(excerpt)
Petrohawk Indenture, Section 4.2, 4.16
Northwest Note Agreement, Section 7.1, 7.2, 7.3
Newpage Credit Agreement, Section 5.1, 5.6
Overview
- Covenants are stronger in bank loan agreements than in private/public bond indentures

Bank loan: has fewer parties, less trading

Public bond: huge number of holders, large amount of trading
- Effect of such differences

Ability to monitor
 Bond: disperse holders subject to collective action problem, high turnover in holders  reduces ability and incentive to monitor

Costs of obtaining amendments
 Bank loan: lower, relatively easier and regularly gets amendments
 Bond: higher, complicated due to large amount of holder who know little, may be reluctant

Reputational incentive of creditors
 Bank loan: bank don't want to have reputation to extract money from their creditors  no one would want to borrow from the bank, need to be nice to their customers
 Publicly traded bond: no reputation incentives, even if they buy a lot of bonds, company is not in control of who buy their bond,
co. has no reason to be nice

Covenant structure
 Affirmative (requires certain acts) vs. negative (prohibit certain acts)
 Tight vs. loose
 Bonds: tend to have looser covenants  less amendment needed
 Loan: tighter covenants
 High vs. low info rights
 Incurrence vs. maintenance
 Public issued bonds tend to be incurrence covenant

Less likely to be breached, usually within control of the co.
 Banks: tends to have maintenance covenants require things to be true 1 IV. Covenants

What information rights do bondholders have?
Default Notice
- Petrohawk 4.16 Compliance Certificate.
o "(a)…within 90 days after the end of each fiscal year of the Company ending after the Issue Date a statement stating whether or not the signers know of any Default or Event of Default that occurred during such period

(c) So long as any of the Securities are outstanding, the Company will deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such
Default or Event of Default and what action the Company is taking or proposes to take with respect thereto."
o Company would tell you there is a breach of covenant (underlying default)  if failed to tell you = breach of 4.16  same to be in breach of one covenant and two covenants
 Principal remedy: acceleration  but you can only accelerate once

Unlikely that the company would send you fraudulent compliance certificates
 Not telling under (c) is a breach of contract by the company, but from the co.'s perspective  breaching once and twice is the same
 Signing a compliance certificate that is false = breach of company + personal fraudulent of the signer

But if ambiguity in the default  may find a lawyer to interpret it that the court would find there is no default  can sign now without being fraudulent

Also, default may be fixed within 90 days  would only send certificate at the end of that 90 days

Relatively good clause for the bondholders, comparing to FreeportFreeport

4.09 "The Company shall deliver to the Trustee within 120days after the end of each fiscal year of the Company an Officers' Certificate stating that in the course of the performance by the signers of their duties as Officers of the Company they would normally have knowledge of any Default and whether or not the signers know of any
Default that occurred during such period."
o No immediate notification upon default

Only Officers' Certificate within 120 days after end of each fiscal year
 certificate only relates to the fiscal year  if default after 120 days,
would only find out the next year 2 IV. Covenants

o

A lot of manipulation possible  non-obvious default may not be known to bondholders; obvious defaults need not be notified by co.
(e.g. late interest payment)Newpage 5.1(d)(f)
o (d) Compliance Certificate

(f) Notice of Default. "Promptly upon any Senior Officer of co. obtaining knowledge (i) of any condition or event that constitutes a Default or an
Event of Default or that notice has been given to Co. with respect to…
a certificate of its Authorised Officer specifying the nature and period of the nature and period of existence of such condition, event of change, or specifying the notice given and action taken by any such
Person and the nature of such claimed Event of Default… and what co.
has taken, is taken and purposes to take with respect thereto"Bondholders less likely to find out, co. lower incentive to give notice

C.f. for Bank loan, easier for borrowers to find out, bank would usually give notice, won't want to risk getting caught nor lose confidence

Information rights beyond default notice:
- Newpage: Creditor can get everything + anything else if they ask

5.01(a) Monthly Reports of income, equity, cashflow, subs
 (b) quarterly financial statements
 (c) annual financial statements
 (d) statements of reconciliation after change in accounting principals
 … ERISA report, Financial, Insurance report, Notice of change in board of director, Material change… etc.
o 5.06 Each Credit Party would keep company's account, right to inspect property, need to show them everything and can talk to any officers
- C.f. Newport (Bond Agreement)
o 4.02 SEC Reports  but do not require a covenant get such report

No inspection rights to bondholders
 Unlike bank which can be trusted, anyone can be bondholder 
would have confidentiality issues
- C.f. Petrohawk

4.2 SEC Reports, Co. will furnish to Holders:
 "(1) all quarterly and annual financial info that would be required to be contained in a filing with the SEC on Forms l0-Q
and 10-K if the Company were required to file…
 (2) … If the Company has designated any of its Subsidiaries as
Unrestricted Subsidiaries, then the quarterly and annual 3

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